On Canada Trade, the Devil’s in the Details

At first glance, latest Canadian trade figures were a pleasant surprise, with the trade deficit narrowing unexpectedly to just 303 million Canadian dollars ($287 million) in May.

But the details were less encouraging. Exports shrank 1.6%–their largest monthly decline since July 2012. And the reason the overall deficit slimmed was because imports dropped twice as fast as exports, and for the first time in five months.

In other words, it’s a story of weak external and domestic demand, and it adds to evidence of slower economic growth in the second quarter, which will likely be exacerbated by massive floods in Alberta in late June.

“The details don’t quite provide as much optimism as the headline would suggest,” according to David Tulk, Canada macro strategist at TD Securities.

At best, net exports may be a “small positive” to growth in the April- June period, after adding a hefty 1.5 percentage points to the 2.5% annualized gross domestic product growth in the first quarter, according to Benjamin Reitzes, an economist at BMO Capital Markets.

The second quarter is was definitely “a challenging one for the Canadian economy,” said Mr. Reitzes, who is looking for growth to have decelerated to just 1.4% in the period.

That’s slower than the 1.8% growth forecast by the Bank of Canada in April. Mr. Reitzes said the central bank will likely revise its forecast in its Monetary Policy Report due out in a couple of weeks. The report, which will be published simultaneously with the latest interest rate decision, will be the first under the watch of new governor Stephen Poloz.

About Canada Real Time

Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com